This week has been a messy one for both the taxman and the taxed. The news of the arrest of Keroche Breweries directors, Joseph Karanja and his wife Tabitha Karanja, was shocking.
The Karanjas were charged with at least 10 counts of tax fraud, including evading the payment of Value Added Tax (VAT) amounting to Ksh.12.3 billion for stamps allocated for some of their products, and Excise Duty amounting to Sh. 2.1 billion.
Tax evasion is illegal and may be even criminal. This scuffle between KRA and Keroche has dragged for long like a real-life soap opera. The Kenya Revenue Authority (KRA) has raised numerous tax assessments against Keroche; some of these matters are still pending at the Tax Appeal Tribunal, while others are before the courts.
What is KRA’s strategy? Is it focused on results? If so, on what type of results?
On the one hand, KRA will not succeed alone, they need the corporations they tax and harass; and trying to kill them will not make their results look better. On the other hand, tax evasion is killing our innovation and growth.
The Organisation for Economic Cooperation and Development (OECD) estimates that Africa loses $50 billion to tax evasion annually. The United Nations Economic Commission for Africa (UNECA) doubles this figure to approximately $100 billion.
Interestingly, until this matter is not resolved, Kenya will be far from achieving a Sustainable Development Growth (SDG). This is why the KRA has introduced the intelligence based prosecution led investigations model, which links assets acquired through tax evasion schemes in order to trace and recover them.
Curtailing tax evasion is a task that keeps most governments busy. For example, consider the complexity of the infamous missing trader fraud where the transactions, if in the scale of carousels, may involve illegitimate businesses, fraud syndicates, and innocent traders. There is undoubtedly a pressing need for governments to invest in tracking down these criminals.
Evasion is a ragbag of unethical corporate practices, lax and foreseeably corrupt KRA officers, and an incompetent enforcement infrastructure. In order to find solutions to evasion, the Italian economist Emmanuele Bobbio drew a statistical comparison between firms’ capacity for innovation and productivity growth and their proclivity for tax evasion.
The more evasion the less innovation and growth
Bobbio explains that the probability of a firm engaging in tax evasion being caught increases with the amount of taxes the firm chooses not to pay and with its size. Thus, tax evasion represents a correlated distortion, which reduces the effort of tax-evading firms to innovate (growth will increase the probability of being caught) as well as that of regular firms (through unfair competition).
Thus, tax evasion is a downward spiral that shrinks the tax base and makes the country poorer. Evasion creates a vicious circle that lowers innovation, stagnates production and increases unfair competition. The more you cheat, the less you innovative so as not to be caught. This also means that tax compliance enhances innovation, growth and fair competition.
A clever government, Bobbio says, may use additional revenues from improved tax enforcement systems to lower tax rates for certain strategic sectors and corporations, thus ensuring growth for both small and large companies eventually.
It is difficult to understand why KRA would resolve to prosecute tax related claims through the criminal justice system. This appears to be quite a drastic decision against common sense, and more so when the matter is pending before a tribunal.
Dealing with the Keroche saga
Truth be told, there are two sides in every dispute. Keroche claims that they had already disagreed with KRA on the applicable taxes, they raised the objection and opted to go to the Tax Appeal Tribunal. Sadly, it seems the tribunal has not sat for a while and the matter is still pending.
The fact is that the taxman grew impatient and confronted the beneficial owners of the businesses directly. The intention could be to deter non-compliance, but this raises far deeper questions. It brings a lot of uncertainty into the tax administration process and gives way to reputational risk that will surely affect inflow of capital to the economy. It is like spitting in the mirror.
We need long lasting solutions that do not hurt businesses but at the same time do not compromise on taxpayers meeting their end of the bargain in so far as tax compliance is concerned.
The distinction between constitutional and oppressive governments
In exercising power, the government must be patient and prudent. What distinguishes constitutional governments from oppressive tyrannies is fair administrative action, and the dividing line is very thin.
Tax disputes are definitely bound to arise. They should be resolved numerically, speedily and, as far as possible, amicably. We must aim at efficient dispute resolution mechanisms, particularly mediation. Only if mediation fails, should we go to court, and perhaps the time has come for these courts to be specialised tax courts.
In his amusing wisdom, Winston Churchill said, “…for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
More taxation today may mean today’s survival and tomorrow’s death. Prudence should restrain the government from milking the cows dry, till they give us powder milk.
Prof Luis Franceschi
Founding Dean – Strathmore Law School